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Currency Market Analysis

Jun 24, 2019 | Currency Market Analysis

Global Themes

US and EZ inflation, G20 summit; the week ahead
- Weekly snapshot
- G20 meeting looms
- GBP/USD scales 4-week peaks
- EUR/USD hits 3-month high
- Boris versus Hunt

Weekly Snapshot

Weekly snapshot
It’s a relatively quiet week on the economic data calendar this week with Thursday and Friday hosting the major releases. Final quarter one GDP results will be revealed in the US and UK on Thursday and Friday respectively. Flash inflation from the Eurozone and core personal consumption expenditure (PCE) from the US also drop in on Friday. Minutes of the Bank of Japan’s policy meeting last week will be released on Tuesday morning and an interest rate announcement from the Reserve Bank of New Zealand on Wednesday morning. As usual, developments regarding the US-China trade conflict remain important, with the G20 meeting on Friday and Saturday a key focus. Any Brexit-related news amidst the Conservative leadership contest also remains a focal point for investors.

G20

G20 meeting looms
Financial markets have been rocked since rising tensions in geopolitics has spurred a wave of safe-haven demand and a sell-off in riskier assets. The US-China trade war has been a major influence in risk appetite, as mounting tensions has few betting on a resolution at this week’s key G20 summit.

US President Donald Trump and his Chinese counterpart Xi Jinping will meet at the Group of 20 leaders’ summit in Osaka, Japan, in the hope of resolving the ongoing trade row. Expectations are running low though, and if tariffs are hiked once more, risk sentiment could take a huge hit. Such a scenario could see FX volatility rise as demand for safe-haven currencies like the Japanese Yen and Swiss Franc increases. Excess FX volatility is undesirable for central banks, according to Japan’s top currency diplomat and measures to reduce the value of the Yen may have to be enforced.

GBP

GBP/USD scales 4-weak peaks
After last week’s dovish Federal Reserve (Fed) policy meeting, the US Dollar has continued to flag against a basket of currencies, as its index suffered its biggest weekly decline in over a year. Two interest rate cuts by the Fed are fully priced into the money markets by year-end, with a rising probability of a 50-bassis-point cut at its next meeting in July.

This week the focus will be on the core PCE price index, which is the Fed’s preferred inflation gauge. Durable goods will be released on Wednesday and final quarter one GDP results on Thursday. If the dollar continues to sell-off, GBP/USD may extend its climb above $1.28 and EUR/USD could test the $1.14 handle soon.

EUR

EUR/USD hits 3-month high
The Euro has charged to fresh 3-month highs this morning, as the dollar remains softer after the dovish Fed meeting last week. Attention shifts to key data this week, with Eurozone consumer confidence and flash inflation on Thursday and Friday respectively, to provide fresh directional impetus.

Inflation will be key because the European Central Bank (ECB) President Mario Draghi advised that additional stimulus in the Eurozone economy would be needed unless prices start to rise faster in the bloc. Such easing policy tends to weaken a currency, therefore lacklustre inflation results this week could see the Euro’s recent rally fade.

The rise in EUR/USD over recent days has led to GBP/EUR falling back towards the €1.11 level. For now, there appears some strong support around €1.1146, where it bounced from last week, but a breach of this level could see the currency pair fall into €1.10 territory.

Boris vs Hunt

Boris versus Hunt
Boris Johnson and Foreign Secretary Jeremey Hunt are the final two people competing to replace Prime Minister Theresa May. Sterling has dropped around 5% against the Euro and dollar since early May as fears of a no-deal Brexit rise with the prospect of a Boris victory.

Hard-line Brexiteer Boris Johnson is expected to become the next Tory leader and UK PM, as he won 160 votes in the last ballot to make it to the final shortlist of Tory candidates along with Jeremy Hunt who won just 77 votes. The circa 160k Tory members will vote on the final two candidates in a postal vote, with the winner announced in the week of July 22. Jeremey Hunt has repeatedly called Boris Johnson a coward for dodging head-head debates, supposedly to avoid a slip of the tongue and damaging his leadership bid.


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